Question

Terminal Value plays an important role in enterprise valuation. What factors affect the estimate of Terminal Value? How sensitive enterprise valuation is to Terminal value?

Answer 1

In calculating Terminal Value, we assume that the firm has a perpetual growth strategy that it continues it's firm's operations infinite time. The calculations assume, that there will be a growth rate and with the help of growth rate the firm keeps growing annually every year at that assumed rate. There are two methods to calculate Terminal value, one using with the exit multiple and the other with the help of Gordon growth value. In calculating enterprise Valuation, we opt to figure out the Discounted Cash flows and this is appended with the Terminal Value to arrive the intrinsic value of a stock. Enterprise value is calculated by subtracting the market captialization with Net Debt. Terminal value estimate can be affect by the factors of sum of Free cash flows, WACC, Long term growth in EBIT. Terminal value is effected by the discount rate and by a growth rate assumed over calculating the future forecast of sales and revenue, and this is how terminal value is sensitive to the enterprise valuation.